Mains Marathon

Approach

• Introduce by defining the corporate governance and need for it.
• Mention the role of ethical values in corporate governance with examples.
• Conclude the answer with way forward.

Answer

According to Cadbury Committee, 1992, ‘Corporate governance is the system by which companies are directed and controlled'. Corporate governance is the relationship between a company's management, its board of directors, its auditors, its shareholders, its creditors and other stakeholders.

Need for corporate governance:

The need for corporate governance is essential for ensuring the ethical and responsible functioning of businesses.

• Protection of Stakeholder Interests: Corporate governance ensures that the interests of all stakeholders, including shareholders, employees, customers, suppliers, and the community, are safeguarded.
  • For instance, after the 2010 Radia tapes controversy, corporate governance practices in several companies were scrutinized to ensure they were not involved in unethical practices or compromising stakeholder interests.
• Transparency and Accountability: Effective corporate governance promotes transparency in financial reporting and decision-making processes.
  • One example is the Satyam Computers scandal in 2009, where the company's leadership was involved in financial fraud, highlighting the importance of accountability and transparency to prevent such unethical practices.
• Ethical Business Practices: Corporate governance encourages businesses to adopt ethical practices in their operations, including fair trade, responsible sourcing, and adhering to environmental regulations.
  • For instance, Tata Steel's focus on sustainability initiatives, including their environmental and social performance, showcases their commitment to ethical business practices.
• Prevention of Fraud and Corruption: Strong corporate governance measures act as a deterrent against fraud and corruption within companies.
  • The 2018 case of the Nirav Modi-PNB scam exposed a lack of effective corporate governance at Punjab National Bank, leading to a massive fraud and emphasizing the need for robust governance practices to prevent such incidents.
• Long-term Sustainability: Good corporate governance supports long-term sustainability by ensuring businesses focus on their core values and strategic objectives rather than short-term gains.
  • An example is the Infosys case in 2017, where the company faced issues concerning corporate governance, leading to the resignation of its CEO and the board's reevaluation of their governance practices.

Role of ethical values in corporate governance:

Ethical values play a vital role in corporate governance, influencing the decision-making processes, organizational culture, and overall sustainability of a company.

• Integrity and Transparency: Ethical values promote integrity and transparency in corporate governance, ensuring that companies operate with honesty and disclose relevant information to stakeholders.
  • For instance, after the Infosys whistleblower case in 2019, the company's focus on transparency and ethical conduct helped resolve the issue and regain stakeholders' trust.
• Stakeholder Trust and Reputation: Upholding ethical values fosters trust among stakeholders, including customers, investors, employees, and regulators.
  • For example, Tata Motors' commitment to ethical practices and CSR initiatives has contributed to its reputation as a responsible and trustworthy company.
• Compliance and Legal Accountability: Ethical values in corporate governance encourage companies to comply with laws and regulations, promoting a strong legal framework.
  • In the case of the Satyam Computers scandal, the lack of ethical values led to legal consequences for the company's leadership, highlighting the importance of compliance and accountability.
• Ethical Decision-making: Ethical values guide corporate leaders in making decisions that prioritize the long-term interests of stakeholders and society.
  • The case of Cadbury India exemplifies ethical decision-making, where the company voluntarily recalled its products in 2003 due to contamination concerns, prioritizing consumer safety over short-term profits.
• Employee Engagement and Retention: Ethical values in corporate governance create a positive work environment, fostering employee engagement and retention.
  • Aditya Birla Group's emphasis on ethical values and employee welfare has contributed to its reputation as a preferred employer in India.
• Sustainable Growth and Social Impact: Embracing ethical values leads to sustainable business practices that consider social and environmental impacts.
  • The Mahindra Group's commitment to sustainability and corporate responsibility showcases how ethical values drive their efforts to create a positive impact on society and the environment.

Need to promote ethical values in corporate governance:

As per Uday Kotak Committee on Corporate Governance 2017 promoting ethical values in corporate governance is essential to ensure responsible and sustainable business practices.

• Code of Ethics and Conduct: Companies should develop and implement a comprehensive code of ethics and conduct that outlines the expected behavior and values of all employees, including top management.
  • For example, Tata Group has a well-defined code of conduct that sets ethical standards for its employees and subsidiaries.
• Board Diversity and Independence: A diverse and independent board of directors can bring varied perspectives and ensure objective decision-making.
  • Indian Oil Corporation Limited (IOCL) is an example of a company with a diverse board that includes independent directors, promoting checks and balances in governance.
• Whistleblower Protection: Establishing a robust whistleblowing mechanism empowers employees to report any unethical practices without fear of retaliation.
  • Infosys introduced an anonymous whistleblower policy to protect individuals who report any wrongdoing in the company.
• Sustainability and Corporate Social Responsibility (CSR): Companies should integrate sustainability and CSR practices into their core business strategies.
  • Wipro's focus on environmental sustainability initiatives and community development projects showcases its commitment to ethical and responsible business practices.
• Stakeholder Engagement: Engaging with stakeholders, including employees, customers, and local communities, helps in understanding their concerns and expectations, leading to more ethical decision-making.
  • Hindustan Unilever Limited (HUL) has implemented extensive stakeholder engagement practices in areas like sustainable sourcing and community development.

Corporate governance plays a crucial role in shaping the behavior and decision-making of companies, ensuring they operate in a responsible, transparent, and accountable manner.